OPERATION MANAGEMENT

CAPACITY PLANNING: CHAPTER 6

The determination of capacity and adjustment of

capacity to meet fluctuations in demand is one of
the key problems of production & OPERATIONS
planning and control.

Capacity planning is basically concerned with

matching the resources to demand.

Stable demand makes the task of capacity planning

simple while fluctuations in demand create
problems concerning the acquisition of resources
and matching them up with demand levels.

In an ever-changing world, it might feel like you

need a crystal ball to plan for your company’s
future.
How could you know how much product you will
need to order in three months, six months, or a
year if orders haven’t come in yet?
How do you adapt to evolving customer
expectations? Or scale your business fast to avoid
stock-outs if a surge (outpouring) of orders comes
in?

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The answers to these questions are simpler than
you might think. Successful businesses of all types
use capacity planning to answer similar questions
every day.
What Is Capacity Planning?
Capacity planning is the practice of
planning/determining production capacity and
workforce needs to make sure your supply chain is
equipped to meet demand.

Capacity planning lets businesses know how and

when to scale, identify bottlenecks, create better
design capacity, and mitigate risk, within a
planned period.

The 3 Types of Capacity Planning

The three types of capacity planning make sure
you have enough, but not too much, of three major
resources for both the long- and short-term. You
will want to plan weeks, months, or even a year in
advance.
1. Product capacity planning
Product capacity planning ensures you have
enough products or ingredients for your
deliverables. For a florist, this would be flowers,
vases, and cards. For a pool maintenance company,
this would be things like chlorine that are required
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to do the job. For mfg. org. the raw materials
requirement.

2. Workforce capacity planning

Workforce capacity planning ensures you have
enough team members and work hours available to
complete jobs. This type of planning will also show
you when you need to hire more employees and
help you determine how far in advance you need to
start recruiting based on the length of your on
boarding process.
3. Tool capacity planning
Tool capacity planning ensures you have enough
tools to complete jobs. This includes any trucks,
assembly line components, or machinery you need
to manufacture and deliver your product.
How to Start Capacity Planning
There are three basic steps to capacity planning.

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1. Measure
First, you will need to measure your resource
capacity. How many deliveries can each of your
drivers make in a given period? How many orders can
fit onto each of your trucks? How many hours does it
take your logistics manager  to plan 50 deliveries? It’s
important to answer these types of questions as
accurately as possible because the rest of your plan
will be based on these numbers.
2. Analyze.
Once you have accurate measurements, you can spend
time analyzing this information. Making graphs will
help you understand the numbers and make demand
forecasting easier.
3. Formulate.
The final step is taking all of the information you’ve
gathered and formulating a plan. You can make
calculations to see how much it will cost to fund new
projects or hire a full-time employee vs. bringing on
seasonal part-time workers. You could also calculate
the ROI for upgrading a piece of machinery or adding
assembly lines to your production facilities. The
formulation stage helps you see what the likely
outcomes are for various options, so you can make the
best decision.

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The determination of capacity and adjustment of capacity

to meet fluctuations in demand is one of the key problems

of production planning and control.

Capacity planning is basically concerned with matching the

resources to demand. Stable demand makes the task of

capacity planning simple while fluctuations in demand

create problems concerning the acquisition of resources

and matching them up with demand levels.

STRATAGIC DECISIONS REGARDING CAPACITY:

1. What is the expected growth of the industry and

organizations share of the market?

2. How accurate is the company’s prediction of the

market?
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3. Should capacity planning based on optimistic (confident,

hopeful) or pessimistic (negative) scenario.

4. Should capacity be created in few locations, each with

large capacity or should the company operate from

many locations each with small capacity.

5. How many shifts should the company run each day and

how many days in a week.

6. Percentage of company’s requirements can be met by

giving sub-contracting.

7. What is the management policies for meeting the

targets (eg? Holiday working or over time)

MEASUREMENT OF CAPACITY:

When the firm manufactures a single product the

measurement of plant capacity is simple. The capacity of

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such plant can be measured in number of units per

day/week/month. Eg. Capacity of automobile industry –

vehicles per month, steel industry – millions of tones per

year, millions of meters of clothe in case of textile industry.

However, measurement of capacity becomes very difficult,

when firm produces multiple products with some products

sharing common facilities. In such cases they cannot be

measured in terms of quantity per unit of time, the

capacity is usually expressed in LABOUR HOURS OR IN

MACHINE HOURS.

INFLUENCES OF EFFECTIVE CAPACITY:

Effective capacity is influenced by:

Demand forecasts: it depends on 1. life cycle of the

product, product phase and number of products.

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Labour efficiency: output standards are set by the

industrial engineering dept considering the average

operators and normal pace of working. Labour efficiency

figure changes from m/c to m/c, company-to-company and

individual-to-individual.

Plant efficiency: this factor considers enforced idle time of

the machines because of scheduling delays, m/c

breakdowns, and preventive maintenance.

Multiplicity of shifts: it implies the number of shifts that

the firm should run on each working day. Single shifts

increase investment while multiple shifts increase labour

cost and supervisory costs. – This decision can be taken

after conducting economic analysis for each situation.

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Subcontracting: This decision must be backed by the

systematic and careful cost analysis. Cost comparison

between cost to make and cost to buy.

Management policies: like investments on m/cs, inventory

of spares etc.

CAPACITY MANAGEMENT IN SERVICE OPERATIONS

Capacity management is the ability to balance demand
from customers and the ability of the service delivery
system to satisfy the demand. This places an emphasis on
understanding first, the nature of the demand by
forecasting (Lovelock 1984) and the option for managing
the capacity to meet the expected demand.
Capacity management in service operations is testing
activity for manages because the nature of the service
delivery process and the involvement of the customers in
the process restrict the normal options open for
controlling the process to match supply with demands
namely:
• Altering the capacity

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 • Holding the inventory in anticipation of demand and
• Requiring customers to wait for the service.
Sasser (1976) has suggested two basic strategies for
managing capacity in services of “Level” and “Chase” the
former( level) applicable where capacity is limited and
hence the focus is on influencing demand to be in line
with capacity; and the latter (chase) strategy being
possible when supply can be changed to keep in line with
demand. Consequently, operations managers must
understand the composition of their capacity, the degree
to which it can be changed, and the speed of reaction
(stack, 1987) and the costs involved (Heskett et al. 1990).
CAPACITY MANAGMENT IS ABILITY TO WORK OFF AN
EXISTING DEMAND MARKET FOR A MORE DYNAMIC
MEASURE.
Capacity has a time dimension and is influenced by all
input elements to the system.

DESIGN CAPACITY, EFFECTIVE CAPACITY AND CAPACITY

PLANNING:
Design capacity is the theoretical maximum output of a
system in a given period under ideal conditions.

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Capacity available is the capacity of a system or resource
to produce a quantity of output in a given period of time.
It effected by:
• Product specification change, work content
• Product mix
• Availability of the plant
• Work effort – speed of workforce.
To measure capacity, we need units of output.
AVAILABLE TIME = NUMBER OF MACHINES X NUMBER OF
WORKERS X HOURS OF OPEATION.
The other measures are:
• Utilization = actual output / design capacity. This is a
per cent of design capacity. Also measured as
UTILIZATOIN = (HOURS ACTUALLY WORKED /
AVAILABLE HOURS) X 100%
• Efficiency = actual output / effective capacity. This is
an actual output as a percent of effective capacity.
Also measured as EFFICIENCY = (ACTUAL RATE OF
PRODUCTION / STANDARD RATE OF PRODUCTION) X
100%
• Rated capacity = (available time) x (utilization) x
(efficiency)

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 •
CAPACITY CONSIDERATIONS FOR A GOOD CAPACITY ARE:
• Forecast demand accurately.
• Understand the technology and capacity increments.
• Find the optimum operating level (volume)
• Build for change.
CAPACITY PLANNING VARIATION IN MFG. SETUP AND
SERVICE UNIT:
There always seems to be a lot of haziness around
capacity. Capacity is a measure of the amount of work
that can be possessed in a given time frame.
The variation can be taken by in-house manufacturing
and contract mfg.
CAPACITY LEVELS:
Capacity also needs to be related to the level within the
Service Company and here there may be up to four levels
which are useful for complex service organizations,
characterized by the network and branch structure. The
four levels relate to different orders of scale and
managerial responsibility:
Strategic business unit: depend upon the network –
number and size of the branches or outlets. Here the
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capacity will be defined in output per accounting period
or per calendar year.
The branch – branch is the smallest unit capable of
delivering most of the services. Here capacity is defined in
daily or hourly basis.
The team – kitchen team in a hotel or x ray dept. in a
hospital
The individual sources – a person action with an
equipment – capacity differs in turn planning differs.

FRONTLINE VERSUS SUPPORT ACTIVITIES:

Service delivery is most services contains two
components – front line where there is direct contact
between the customers and second the front-line staff
and support where work is carried out as art of the
service package with the direct involvement of the
customer.
PROCESS STAGE CAPACITIES:
When service delivery consists of number stages, the
capacity at the different stages should ideally be in
balance as for any linked productive system. When the
systems are simple this is not too difficult.

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UNDERSTAND CAPACITY RANGE AND RESPONSE.
Capacity at all the levels will not be constant even the
constant demand. The variability in the execution of work
by people and equipment causes fluctuations.
FACTORS INFLUENCING CAPACITY:
When deciding on the effective capacity, it is necessary to
consider the quantity and nature of the input factors and
also the amount of work which needs to produce the
service.
What limits the capacity?
Establish the most appropriate unit for the statement of
capacity.
List the main elements which make up capacity.
List the factor which influence the main input elements.
Identify the resource which limiting the resources.
UNDERSTANDING THE DEMAND:
Operations manager must be able to translate the
demand into some expression of work content. I.e., the
amount of work which is required to produce the service.
CAPACITY MANAGEMENT – CREATING THE BALANCE:
There are two polar opposites for managing service
capacity, one to hold capacity steady while influencing
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demand and the other of changing capacity to stay in line
with demand.
The Chase strategy described by Sasser entails controlling
the level of capacity by changing the extent of resource
by:
• Altering the number of service providers and / or the
hours worked, often involving the use of part time
staff.
• Sharing capacity between different parts of the
service delivery system.
• Transfer resources typically between back room and
front office
• Using outside suppliers through subcontracting or
leasing to provide resources.
• Asking customers to provide more resource by way
of self-service.
The aim in CHASE strategy is to maintain capacity
closely in line with effective capacity thereby ensuring
maximum efficiency and attainment of service quality
levels.
The Level capacity strategy recognizes real constraints in
altering effective capacity and seeks to influence the level
of demand by way of:
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 • Price changes
• Advertising and promotion
• Developing of peak demand
• Use of appointment and reservation system.
• Making customer queue for the service.
Level capacity strategies are increasingly linked to yield
management systems where effective capacity is
constrained, for eg. Airlines, hotels, and car rentals.
The Coping strategy
Service provider should fine-tune their own combination
of the chase and level strategies by:
• Improving their forecasting capabilities
• Setting clear service quality targets
• Setting clearing resource productivity targets
• Understand critical and hygiene dimensions of their
service quality.
• Understand possible failure points in service delivery.
• Understand the bottlenecks in the service delivery
system.

** ** **
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Scheduling:

Scheduling is another decision area of operations

management which deals with the timing of various

activities – time phasing of the filling of the demands or

rather, the time phasing of the capacities to meet the

demand as it keeps fluctuating. It is evident that as the

span of fluctuations in variety and volume gets wider, the

scheduling problem assumes greater importance. Thus, in

job-shop (i.e., tailor-made physical output or service) type

operations system, the scheduling decisions are very

i9mportant which determine the system effectiveness

(e.g., customer delivery) as well as the system efficiency

(i.e. productive use of the machinery and labor). Similar,

we can also say that the need for system effectiveness

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coupled with system efficiencies determine the system

structure and the importance of scheduling. When “time”

is viewed by the customers as an important attribute of the

output from a production/operations system, then

whatever may be the need of variety and flexibility; the

need for scheduling is greater and the operations system

choice is accordingly inf. Thus, when a mass production of

output is envisaged, but with a quick response

characteristic to the limited mild variation, the

conventional mass production assembly line needs be

modified to bring in the scheduling element, so that the

distinctive time element is not lost in the mass of output.

This necessitates significant modifications in the mass

production system and what emerges is a new hybrid

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system particularly and eminently suited to meet the

operations systems objectives.

THE CAPACITY MANAGEMENT AND SCHEDULING CANNOT

BE VIEWED IN ISOLATION AS EACH EFFECTS THE OTHER.

Measuring Available Capacity

Before determining the Capacity Available, one need to

understand the factors that affect capacity and the units

used to measure capacity. Understanding and considering

these will help in determining the capacity available more

accurately.

Factors Affecting Capacity

Product Specifications

If the product specifications change, the work content

(work required to produce the

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product) will change, thus affecting the number of units

that can be produced.

Product Mix

Each product has its own work content measured in the

time it takes to make the product.

If the mix of products being produced changes, the total

work content (time) for the mix will change.

Plant and Equipments

This relates to the methods used to make the product. If

the method is changed – for example, a faster machine is

used the output will change. Similarly, if more machines

are added to the work center, the capacity will change.

Work Efforts

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This relates to the speed or pace at which the work is

done. If the workforce changes pace, perhaps producing

more in a given time, the capacity will be altered.

Capacity Measuring Units

Units of Output

If the variety of products at a work center is not large, it is

often possible to use a unit common to all products. Ex.,

breweries measure capacity in barrels of beer, automobile

manufacturers in number of cars. If a variety of products is

made, a good common unit may not exists. In such case,

the unit common to all products is time.

Institute of Manufacturing Resource Management of India

Standard Time

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Using time-study techniques the standard time for a job

can be determined—that is, the time it would take a

qualified operator working at a normal pace to do the Job.

It provides a yardstick for measuring work center content

and a unit for stating capacity. It is useful in loading and

scheduling.

Available Capacity

“The capability of a system or resource to produce a

quality of output in a particular time period”. To calculate

available capacity, we need to know Available time,

Utilization and Efficiency.

Available time :

It is maximum Number of hours a work center can be used.

It depends on the number of machines, the number of

workers, and the hours of operation.

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Example

A work center has six machines, operated for eight hours a

day for five days a week.

Calculate available time.

Available time = 6 x 8 x 5 = 240 hrs per week

Utilization :

As a result of breakdown, maintenance a work center is

not fully utilized. The Percentage of time the work center is

actually used is called Utilization

Utilization = hours actually worked /available hours x 100%

Example:

Calculate utilization if a work center is available for 160

hours a week, but produces for 100 hours only.

Utilization=100 / 160 x 100% = 62.5%

Efficiency :

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The workers working on the machine are not fully trained

or machines are worn out & hence the output of machines

will be less than standard hours of work as expected.

Efficiency is a measure of actual out put of a work center

compare to standard output expected. It is expressed in

percentage.

Efficiency = Actual rate of production / Standard rate of

production x 100%

Example:

Calculate efficiency if a work center is used 100 hours per

week and produces 120 hours of work.

Efficiency=120 / 100 x 100% = 120%

Ways of Determining Capacity

We have to two ways to determine the capacity available.

Demonstrated (Measured) capacity is figured from

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historical data. Rated (calculated) is figured from available

time, utilization and efficiency.

Rated Capacity

Rated Capacity is calculated by taking into account the

work center utilization and efficiency. It is the product of

available time, utilization and efficiency.

Rated Capacity = Available time x Utilization x Efficiency

Available time: is the number of hours work center can be

used. It depends on the number of machines, the number

of workers and the hours of operation.

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